TAR UC (FAFB) – RAC Year 3 (ACADEMIC YEAR 2021/2022)

BBFT3014/BBFT3013 ADVANCED TAXATION

Tutorial 3: Tax Incentive – RA & Double Deductions (R&D Co.) Suggested answer to Q1

RAC Tax Consultant Sdn. Bhd.

110, Jalan Bersatu,
50000 Kuala Lumpur, Malaysia.

Current date 2021

The Board of Directors

Segar Sdn. Bhd.
No. 12, Jalan Berusaha
Muar, Johor, Malaysia.

Dear Sirs / Madam,

Reinvestment Allowance (RA)

We understand that your company which is manufacturing health tonics since the year 2014is considering to claim
‘reinvestment allowance’ for the first time for the year of assessment (YA) 2021. We have the pleasure of
advising your board on this tax incentive as follows:

(a) Eligibility to claim RA

Your company is eligible to claim RA for YA 2021 as it has fulfilled requisiteconditions as follows:

(i) It is a resident company in Malaysia carrying on a manufacturing business; (ii) It has been in
operation for not less than 36 months (since 1 January 2014); (iii) It had undertaken a qualifying
project in modernising the existing manufacturingactivity in the year ending 31 December 2021;
and
(iv) It had incurred qualifying capital expenditure on factory (extension), plant andmachinery (used for the
purpose of the qualifying project) in the basis period for YA 2021.

(b) The mechanism of this tax incentive

This tax incentive is given by way of an allowance (reinvestment allowance). RAis given at a rate of 60%
on qualifying capital expenditure incurred in the basis period for a year of assessment. The RA can be
deducted against 70% of statutory income frommanufacturing for each YA. The other 30% of statutory
income will be taxed at theprevailing rate for company.

In respect of the amount of RA utilized in a particular YA, equal amount of statutoryincome from
the manufacturing business will be exempt and it can be creditedtoan exempt account. Exempt
dividends can be distributed out of this account, subject toyour company has an equal amount of
retained earnings to distribute dividend(s).

(c) The period for this incentive

RA can be given for 15 years of assessment from the first YA in which basis periodcapital
expenditure was first incurred. These 15 YAs would be fromYA2021toYA 2035. Qualifying
capital expenditure on the factory (including the cost of extensionand/or renovation), plant and
machinery directly in use for the purpose of a qualifyingproject must be incurred within the basis
periods for these 15 YAs.
BBFT3014/BBFT3013 ADVANCED TAXATION Suggested answer to Q1

(Cont’d)

(d) RA, exempt income and chargeable income for each of the year of assessment
 The estimated amount of RA claimable, exempt income and chargeable income for eachyear of
assessment from YA 2021 to YA 2024 are as follows:
YA 2021

RM’000 RM’0 RM’0

00 00

Exempt income 1,400 4,060 6,300

Chargeable income 450 1,590 2,550

RM’000
0
0

Please refer to the Appendix attached.

(e) Circumstances under which RA cannot be claimed

A machine which is in use for purpose of business in the basis period for YA2021cannot be given
RA under any one of the following circumstances:

1. The machine was acquired by way of a control transfer under any one of the relevant situation as
described under Para. 38(1) Sch. 3.

2. The machine is used by the director(s), or any member of administration, management or clerical
staff.

3. The machine is a leased (rent) asset.

4. The machine was used for business but not specifically for purpose of the qualifying project.

5. The machine was disposed of in the basis period for YA 2021.

6. The machine was to replace an existing/old machine in use for manufacturingbusiness.

We hope the above information and advice are helpful. Please do not hesitate to contact us for any further
information or clarification.

Thank you.

Yours faithfully,

Daniel Chew
Daniel Chew, Tax Manager
RAC Tax Consultant Sdn. Bhd.
BBFT3014/BBFT3013 ADVANCED TAXATION

Suggested answer to Q2
RAC Consultancy Sdn Bhd
No. 1, Jalan Bersatu
50000 Kuala Lumpur

Current date

The Board of Directors

Herbs Sdn. Bhd.
No. 2, Jalan Bahagia
50300 Kuala Lumpur

Dear Sir / Madam,

Reinvestment Allowance (RA)

We refer to the above tax incentive and are pleased to provide the following informationas requested for your kind
attention:

(i) The period of the tax incentive

The period of the tax incentive for RA is 15 years of assessment (YAs) fromthe first year of assessment in
its basis period in which qualifying capital expenditure on factory, plant and machinery is first incurred (i.e.
YA 2021 to YA 2035).

(ii) Type of qualifying capital expenditure

Reinvestment allowance (RA) can be given on qualifying capital expenditure incurredonplant and
machinery, factory, clearing and levelling the land, drainage and irrigationdirectly in use for plantation.

(iii) The rate of RA and its deduction

RA is 60% on qualifying capital expenditure incurred in the basis period for a YA. The RAdeduction against
the statutory income from business is 70%.

(iv) Unabsorbed / Unutilized RA

Any RA that cannot be given or cannot be given in full can be carried forward andbededucted against 70%
of statutory income from business in the subsequent YAs.

The unabsorbed / unutilized RA after the end of the tax relief period (after the 15 YAs) it can be carried
forward to set-off against 70% of statutory income from business withinaperiod of 7 consecutive YAs. After
the end of 7 YAs, any unabsorbed / unutilized RAwill be deemed as Nil / disregarded.

(v) Exempt income

The amount of RA deducted in a YA which is equal to the statutory income abated canbecredited to an
exempt account. Dividends that are paid out of this account are tax exempt inthe hands of the corporate
shareholders on a two-tier basis.
BBFT3014/BBFT3013 ADVANCED TAXATION
Suggested answer to Q2 (cont’d)

(vi) Computation of RA for YA 2021

Qualifying Capital Expenditure (QCE) RM’000

Farming land 0

Plant & machinery 12,000

Clearing and levelling the land for planting 7,000

 Drainage and irrigation 4,000

Factory (RM16 million – RM3 million land cost) 13,000

Living quarters for workers 6,000

Total QCE 42,000

Qualifying Capital Expenditure RM42,000,000 x 60% = RM25,200,000 ===========

(vii) Two similarities and differences between RA and ITA

Similarities
Reinvestment Allowance (RA) Investment Tax Allowance (ITA)

1. Similar capital expenditure incurredindustrial

Capital expenditure incurred on industrial building,
building, plant and machinerycan qualify for on
reinvestment allowance. plant and machinery can qualify for investment
allowance.

2. Generally, RA can be deducted70% Generally, ITA can be deducted against 70%of

of statutory income. against
statutory income.

3. For a given year of assessment, abatedstatutoryincome

For a given year of assessment, abatedstatutory
income from business (equal tothe RA utilized) can befrom business (equal to the ITAutilized)
creditedexempt account from which tax exemptdividends can be credited to an exempt account
can be distributed. to an
from which tax exempt dividends can be distributed.

4. RA given can be withdrawnqualifying plant/machine ITA given can be withdrawn if a qualifying

is disposedwithin 5 years from its date of acquisition. if a
plant/machine is disposed of within 5 years fromits
of
date of acquisition.

5. Any current year business lossbusiness Any current year business loss frombusiness
(manufacturing / agriculture)be deducted against from
the aggregate(all sources: business and non- (promoted activity / promoted product) canbe
businessincome) in arriving at the total income. can
[s44(2)] deducted against the aggregate income (all sources:
income
Any unabsorbed business loss (duringtax incentivebusiness and non-business income) in arrivingat the
period) can be carriedforward to subsequent YAs
total income. [s44(2)]
anddeducted against the aggregatefrom all
businesses. [s43(20].
Any unabsorbed business loss (duringthetaxincentive
After the end of the tax incentive(15 YAs), the
period) can be carried forwardto
unabsorbed businesscan be carried forward
the
upconsecutive YAs to deduct againstaggregate subsequent YAs and to be deducted against the
income fromAfter end of the 7 consecutive YAs,
aggregate income from all businesses. [s43(20].
anyunabsorbed / unutilized amount willdeemed as
Nil / disregarded. to be
income
After the end of the tax incentive periodthe unabsorbed
 business loss can be carriedforwardup to 7 consecutive
YAs to deduct against
period
aggregate income from all businesses. After endof
loss
the 7 consecutive YAs, any unabsorbed / unutilized
to 7
amount will be deemed as Nil / disregarded.
the
all businesses.
be

tax

(5YAs),

the
Differences:
No. REINVESTMENT ALLOWANCE (RA) INVESTMENT TAX ALLOWANCE(ITA)

1 A company must have been in operationA new company can claimITA. for at
least 36 months to qualify for RA.

2 A company must carry on a

A company must carry on a business involving
manufacturing or agricultural but needpromoted manufacturingbusinesswith a promoted product or
product or promoted activity. an agriculturebusiness
not be a
involving a promoted activity.

3 A company must have a qualifying The company is not required to have

projectinvolving expansion, modernization, automationin anyqualifyingproject to claim ITA.
existing business or diversification intorelated a
activity/product within the sameindustry.

4 The qualifying capital expenditure must

The qualifying capital expenditure must be
incurred within the basis periods for 15consecutivebeincurredwithin 5 years from the date of approval
byMIDA.
years of assessment (YA’s) fromthe first YA in which
basis period it was firstincurred.

5 The unutilized RA after the end of the The unutilized ITA after the end of thetaxrelief
period (after 15 YAs) it can be carriedto set-off against 70% tax relief
of statutory income frombusiness within a period of 7 period (after 5 years) it can be carriedforward
 consecutiveAfter end of the 7 YAs any unabsorbedunutilized forward
RA will be deemed as Nil. indefinitely to set-off against 70%of statutory
income from business.
YAs.
/

6 No application is required but approval is Application of approval is given by Malaysian

by the Director General of Inland Revenuebased on annual given
return form submitted to theInland Revenue Board.Investment Development Authority (MIDA) /
Malaysian International Trade &Industry(MITI)

We trust that the above information is helpful to your company. Should you need any further clarification or
information, please do not hesitate to contact us.

Thank you.

Yours sincerely,

Felix Tan
Felix Tan
Tax Director
BBFT3014/BBFT3013 ADVANCED TAXATION

Suggested answer to Q4

(a)(i) Under s.34A of the Income Tax Act 1967, expenditure on research and development (R & D) qualifies for
double deduction in computing the adjusted income of a business if:

1. It is revenue in nature;
2. It is for an activity that falls within the definition of research;
3. It must be for an approved R & D project(s) and must be incurred in the basis period;
4. An application for approval is submitted to the Technical Division of the InlandRevenue Board of
Malaysia (IRBM) using a prescribed form which has tobecertified by an approved (external) auditor.

(a)(ii) The following expenditures will qualify for double deduction:

RM
Raw materials for research 100,000 Research staff salaries 300,000 Research equipment
(capital expenditure) 0 Rental of other research equipment 95,000 Building renovations
(capital expenditure) 0 Rental of building for research 120,000 615,000

Only RM615,000 x 85% = RM522,750 will be eligible for double deduction as 15%of the intended
activities are not R & D activities. The 15% of the expenditures equal toRM615,000 x 15% = RM92,250
will qualify for single deduction only sincethe conditions for double deduction will not be met.

Expenditure incurred on quality control or routine testing of products does not fall within the definition of
R & D and will not eligible for double deduction. Singlededuction will be given as these expenses will be
incurred in the production of business income.
 Capital expenditure incurred on the renovations of rented premises for the purpose of carrying on research
will qualify for industrial building allowance under Para. 37Bof Sch. 3 of ITA, 1967 once the research has
been approved.

Capital allowance and industrial building allowance can also be claimed for the researchequipment
and building renovations respectively.

Capital allowances in respect of machinery or plant used can be claimed under Para. 37D of Sch. 3
of ITA, 1967.
BBFT3014/BBFT3013 ADVANCED TAXATION

Suggested answer to Q4 (cont’d)

(b) The circumstances under which a double deduction can be given for research expenditureunder ss.34A
and 34B, ITA,1967 are:

(i) Where the research is approved by the Director General of Inland Revenueunder powers delegated
to him by the Minister of Finance.

(ii) Where the expenditure is made by a person within ten years fromthe date of approval for industrial
adjustment allowance [under s.31A of the Promotionof Investments Act 1986.]

(iii) Where it is a contribution to an approved research institute.

(iv) Where it is a payment for use of the services of an approved research institute. (v) Where it is a

payment for use of the services of an approved research company.

(vi) Where it is a payment for use of the services of a research and development company.

(vii) Where it is a payment for use of the services of a contract research anddevelopment company.

Note:
If the R&D co does not enjoy ITA incentive, the payment for R&D services by its relatedcompany to
the R&D co qualify for double deduction.
See the law: Section 34B para 2 below

The amount of deduction to be made under subsection (1) shall be twice the amount of expenditure,
not being capital expenditure, referred to in that subsection:

Provided that no deduction in respect of that expenditure shall be made under this section to a person being
a related company of a research and development companywhich has been given approval under subsection
27D(1) of the Promotionof Investments Act 1986 and whose period as prescribed under paragraph 29E(2)(b)
of that Act has not ended.
BBFT3014/BBFT3013 ADVANCED TAXATION Suggested answer to Q4

(cont’d)

(c) A research and development company (R&D Co) is a company which provides researchand
development services in Malaysia to its related company or to any other company.

A contract research and development company (Contract R&D Co) is a company whichprovides research
and development services in Malaysia only to a company which is not its related company.

A related company means (in Section 2 of PIA, 1986):

i. its holding company
 ii. its subsidiary, or
iii. a subsidiary of its holding company.
iv. associated co (at least 20% issued share co directly or indirectly ownership)

A contract R&D company is eligible for either one of the incentives below: 1. Pioneer status –
exemption of 100% (instead of the standard 70%) of the statutoryincome for five years from its
production day; or
2. ITA – 100% (instead of the standard 60%) of qualifying capital expenditureincurred within ten years
(instead of the normal five years) to be set off against 70% of the statutory income.

An R&D company does not qualify for pioneer status: it is eligible for ITAonly. TheITA available is
100% of qualifying capital expenditure incurred within 10 years set off against 70% of statutory income.